Buy-to-let landlords have been hit with key changes to the tax reliefs available.
The chancellor has restricted ‘finance cost relief’ for individual landlords which will affect individuals that receive rental income on residential property in the UK or elsewhere, excluding where the property meets all the criteria to be a furnished holiday letting. This measure will be introduced gradually from 6 April 2017 and restrict relief for finance costs on residential properties to the basic rate of Income Tax, currently 20%.
Landlords will be able to obtain relief as follows:
- in 2017/18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020/21 all financing costs incurred by a landlord will be given as a basic rate tax reduction
If we fast forward to 2020/21, higher rate tax payers will be affected in the following way, as illustrated by means of this example:
Currently, £1,200 profit after tax is made. In 2020/21 a £400 loss after tax is made. The landlord’s cash position could be far worse with a repayment mortgage.
The policy objective
It is intended to address the unfairness of the current system in which homeowners obtain no tax relief on their mortgage payment compared with landlords who obtain tax relief in full.
In addition the ‘wear and tear allowance’ will be removed. This allowance currently permits landlords of furnished properties to deduct 10% of rents received from taxable profits. From April 2016, only the cost incurred on new furniture will be tax deductible. In the majority of cases the allowance more than covered the cost of furniture and the new measure will have a considerable impact on the tax position of many landlords.
There is however better news for live-in-landlords. The rent-a-room relief which has been at £4,250 since 1997 will be increased to £7,500. In effect the first £7,500 a year of income from a lodger will be tax free. It is also possible to switch from deducting a proportion of actual expenses from one year to the next.
Buy-to-let landlords who are higher rate taxpayers and have high loan to value repayment mortgages will be very badly hit by these new measures. If currently a buy-to-let house on repayment is a cash break even proposition, in 2020/21 this will likely turn into a severe cash outflow each year.